From My Work in Progress Basket

Delray Beach, FL.- My family has a small interest in a Craft Beer Brewery owned by friends of ours. Because our interest is small and because they are friends, I do my best to limit my input to answering questions they ask, which are few and far between.

But that doesn’t mean I don’t have questions of my own.

Since the beginning, for example, I’ve wondered how much taste matters when it comes to selling beer. Is there a relationship between how good a beer tastes and how well it sells? Is there even such a thing as “good” and “not good” when it comes to taste?

I’m intrigued by this issue because I’ve had to grapple with something similar in almost every business I’ve worked with – questions about the relationship between product quality and sales.

In this particular case, my friends have spent a small fortune working on the quality of their brands. To them, there is a real difference between the quality of one pilsner and another.

They also believe – and this I don’t dispute – that consistency in taste is a very important factor in building a best-selling brand.

But is the taste of one beer really better than another? Or is it just a matter of personal preference?

And if so, why bother trying to make your beer taste “better” according to some expert standard of excellence? Wouldn’t it be smarter to simply find out which ones have the widest consumer appeal?

The fact is, I’ve been thinking about the question of quality in relationship to everything from cigars and wine to art and literature for most of my adult life.

And here’s what I believe: There is an absolute difference. Some Cabernets are better than others. As are some cigars. As are some books. As are some works of art.

But the number of people that can identify or even notice gradations of quality are small. Depending on the item in question, my guess is that less than 10% can tell the difference.

When it comes to cigars and tequila, I consider myself among the minority that can distinguish between, good, bad, and mediocre. I feel the same way about literature and art.

Beer? I haven’t a clue. And I’m willing to bet that 90% of the beer drinking market can’t tell the difference either. Actually, I’d say 98% of the mainstream beer drinking market and perhaps 80% of the craft beer market.

Delray Beach, FL.- A colleague refers to himself in his publicity as “the world’s most ___-ed man.”

Good idea or bad idea?

Epithets have power when they are short and apt and memorable. Like Honest Abe. Or Tricky Dick.

In my colleague’s case, the tag came honestly – borrowed from a book jacket endorsement. And he’s been repeating it lately in what looks like a strategic effort to carve out a “niche” in his market.

It’s an old but still interesting approach: Find an unoccupied knoll in the landscape of your industry, claim it as your own, and then do everything you can to remain king of it. If you can gain the reputation of being the smartest or most honest or most reliable person in your neck of the marketplace, you’ve achieved something very valuable.

Likewise, gaining a reputation for being a master of a particular business skill is immensely valuable. You will always have more work than you can handle. And you’ll be able to charge more for your time than your competitors will be getting. In fact, if you are smart in choosing customers/clients, you could make twice or three times the amount others in your field typically make.

And once you have the reputation, using an epithet is a super-efficient tool for establishing a personal brand.

Building True Expertise

If the field you work in is crowded, it’s difficult to rise to the top. This is when it makes sense to narrow your brand to a small or neglected niche.

For example, 20 years ago, when I first started writing about business (in Early to Rise), there were all sorts of people out there claiming to be experts in internet marketing.

But within five years, the field had expanded so rapidly that it was no longer credible to position oneself as an Internet Marketing Master. So what happened then was a proliferation of people promoting themselves as gurus of particular aspects of internet marketing – like free-to-paid or VSLs or webinars or product launches. Dozens of individuals developed multimillion-dollar businesses by claiming the high ground in these niche areas.

To be successful as an internet marketer today, you have to get even more specific. You might, for example, develop expertise in product launch formulas for natural health products using YouTube as the medium. So if I were starting out now and wanted to enjoy the benefits of a personal brand, I’d certainly consider using the efficiency of an epithet. But I’d make sure that it would be a very, very narrow handle that I could justly claim for myself. Because if you claim to be what you are not, you will do the opposite of what you want to do.

Delray Beach, Florida.- Most of the stocks in my core investment portfolio – my Legacy Portfolio – are dividend-paying stocks. And since I don’t rely on cash from those dividends for current income, my practice is to reinvest it.

The common way this is done is automatically through a dividend reinvestment program (DRIP). That is an order you give to your broker to use the dividends of a stock to buy more of that same stock.

When I designed the Legacy Portfolio (with the help of Tom Dyson and Greg Wilson), I wanted very much to reinvest the dividends, but I was doubtful about DRIPs. My question to them was a simple one:

“In every other investment I’ve ever made, the price I pay for the asset matters. I assume this applies to stocks. If that’s true, why would I use DRIPs, which are designed to buy more of the same stock regardless of the price?

“What if, instead of automatically investing each dividend in the selfsame stock, we accumulated the dividends as they arrived, kept them in cash for a while, and then invested them in just one or maybe two stocks that were currently underpriced?”

Tom and Greg did a fairly extensive analysis of my proposition and came back with the encouraging conclusion that such a practice would increase overall yield. (I don’t remember the differential, but it was significant.)

I mentioned this in a recent videotaped interview that Legacy Publishing group did with Bill Bonner, Doug Casey, and me. And it prompted a viewer to write this to me:

“I’ve read your strategy for buying income-producing real estate. You determine whether the asking price is fair or not with a simple formula: 8 times gross rent. What I want to know is if you have such a simple formula for determining the value of a particular stock, both for making the initial purchase and for re-investing the dividends.”

This is what I told him…

Determining a “fair” price for a dividend stock is a bit more complicated than it is when you are valuing income-producing real estate.

For one thing, stocks are shares in businesses, and businesses are more dynamic than houses and apartment buildings.

They are dynamic and they are organic. How they change is not up to you. Rental properties, on the other hand, are fixed and tangible. Except for an event like a hurricane or fire (which can be insured against), they change only when you do something to them (add a bathroom, paint the walls, etc.).

Which is to say it’s easier to get a reliable estimate of the market value of a rental property. You compare it to similar properties in that location at that time.

That said, there are numerous ways to determine whether a particular stock, a stock sector, or the market is “well” or “fairly” priced.

As Bill Bonner pointed out in his December 7 Diary, Warren Buffett’s favorite yardstick was to measure the relationship of total market capitalization (the value of all stocks added together) to GDP. Logic dictates that a good ratio would be below 100%, because a stock cannot be worth much more than the GDP of the country that supports it.

Another, more indirect, way to look at it, Bill said, is to compare U.S. household net worth(which includes real estate, bonds, and stocks) to national output.

And yet another calculation looks at the number of hours the typical person would have to work to buy the S&P 500 Index.

What are all these measurements telling us about the U.S. stock market today?

The idea is not complicated: Historically, white men have benefited from being at the top of the pecking order in most modern societies. Some activists argue that this advantage became institutionalized in the economic, political, and cultural experience of people as paternalistic hierarchies — and that this is responsible for most of what is bad in the world. In particular, the grossly unequal distribution of wealth and power that hampers (if not actually prohibits) the advancement of all women and every other ethnic and racial group.

Their argument is, in other words, a philosophy of blaming.

Aiden’s letter was, in part, a reiteration of their stance that since white males are to blame, the solution is to knock them out of their privileged positions and replace them with women and people of color. Once that is done, the equality of not just opportunities but outcomes will be possible.

In South Africa, he says, “white male privilege is real.” And 24 years after apartheid was abolished, it is still “glaringly obvious” in every corner of the country, from “the boardrooms of large corporate companies to the dusty streets of the townships.”

“As a colored man from South Africa,” he says, “I live in a world that is unfair, unequal, and scaled on gender-race privilege.”

He challenged me: “Now ask yourself, how is a black child who is undernourished, uneducated, and displaced supposed to raise themselves out of poverty and into a world where they have more than enough?”

Delray Beach,FL.- One of the first things a copywriter learns about selling diet products is that it is very important to say, at some early point in the sales message, “It’s not your fault.”

This does several good things.

It makes the targeted customer feel good to have the burden of responsibility lifted from his shoulders.

It relieves, to some degree, the shame of being overweight. (“If it’s not my fault, why should I be ashamed?”)

It creates a sympathetic bond between the person delivering the message and the targeted customer.

Now if you know anything about obesity, you know that there is sometimes some truth to the not-your-fault statement. Some causes of obesity are genetic. Not all. But some. And it is perfectly fair to assert that one of the reasons Americans are so fat is because they’ve been given incorrect information about healthy eating since they were children. The widely held (and then dispelled) idea, for example, that eggs are both fattening and also a danger to heart health. So you can imagine that the copywriter with a conscience might want to mention facts like these in his copy to support the much broader claim that obesity is not the fat person’s fault.

Bad eating habits are, of course, the primary cause of obesity. But the intelligent copywriter knows he’s not going to sell any diet pills by pointing that out.

We do the same thing when we are selling wealth-building products. Recognizing that our targeted customer feels angry and/or ashamed because of his lack of financial success, we can offer him some immediate relief by telling him that it is not his fault – even though some part of it probably is.

How I Learned to Avoid Shame by Blaming Myself

Many years ago, when I first began to study advertising, the gurus at the time pretty much agreed that the most effective ads were those that appealed to the prospective customer’s emotions – in particular, to his greed or fear. I launched an argument then that continues today: those hidden emotions, like shame, are much stronger. And that indirectly addressing those emotions is a much better way to gain and keep customers.

“A light went out in our bathroom. I remember that I changed it 14 years ago. I showed my son how to do it, thinking surely it is the last time that I’ll change it.”

It reminded me of something Gary North, who was in his mid-sixties at the time, wrote about a dozen years ago. It went something like this:

“Just bought a suit. It’s inexpensive but well made, a nondescript charcoal gray that I can wear for almost any occasion. A good investment, considering the likelihood that this may be the last suit I ever buy.”

It stunned – and spooked – me.

Now I’m doing the same thing. All the time.

Should I get a new car? I don’t see why. I have more cars than I need right now. The car I drive is an Audi S5 coupe. I bought it slightly used five years ago. It’s fantastic – reliable and fun.

The other two, a 27-year-old Acura NSX and a 13-year-old BMW 850, are rarely used. Should I sell them? No. They cost almost nothing to maintain. And they will likely hold their value. Someone will figure out what to do with them when I die.

The last suit I bought – for Patrick’s wedding five years ago… was that my last? Yes, I think it was. I have a half-dozen perfectly good suits in my closet. I might wear each of them once a year.

Sometimes these intimations of mortality prompt me to spend more.

“A six-foot tree would be one-quarter the price,” Paul Craft, my palm tree consultant, tells me. “And it will be 30 feet tall in only 15 or 20 years.”

“Only 15 or 20 years?” I say, laughing and shaking my head. “No. Order the biggest one you can find.”

We joke about death, but only to trivialize it, to temporarily diminish the dread.

At my book club meeting last night, we talked about the fear of death. (We were reviewing two books: Sapiens: A Brief History of Humankind by Yuval Noah Harari and The Lessons of History by Will and Ariel Durant.) About half of the group (four) admitted to that fear. The other half said they didn’t. I said that the only way one can be fearless about one’s death is to deny it. I said something like, “If you really contemplate your own death, the utter extinction of your personal self, you cannot feel anything but terror.”

Nicaragua.- NP believes that when parents hit their seventies they should start giving away their assets to their children as fast as they can.

“Making them wait till you die is manipulative,” he says.

I say “I don’t think parents should feel obliged to leave their kids anything. They should expect their kids to be able to take care of themselves.”

NP also believes that older parents should live in assisted living facilities so that they “aren’t a burden to their adult children.”

I believe adult children should feel honored to take care of their parents as they become less capable of caring for themselves. “Caring for a family member is a privilege,” I say. “And it’s morally correct. These are the people that gave you life and took care of you for umpteen years when you couldn’t care for yourself.”

We were talking about the same topic, but our views are 180 degrees apart. And yet when we talk about other things that matter – work and economics and politics – our views tend to be aligned.

Why is that?

I think I know why because I have known NP since he was a small child. His dad and I were partners for many years.

NP’s parents held family in high regard. And within the family, children came first. When it came to education, public schools were not even considered. And when it came to selecting private schools, they would sacrifice anything to make sure their kids went to the best.

They had the same idea about “things” like cars and clothes and computers and everything else.

My parents came from a culture for which family was important but the role of children within the family was very different. Children were not the focus. They were expected to help out and to respect their elders. And anything they got – which was very little – they got not because they deserved it, but because their parents were being generous.

Today, I have friends that brought up their kids as NP’s parents did. And I have friends that brought them up the way my parents did. (Which was the way K and I brought up our kids.)

I also have a few friends that had an entirely different attitude. They seemed to believe their responsibilities as parents ended at the child’s birth. They abandoned their children when they were very young and never looked back.

Delray Beach, FL.- For the first half of my business career, I spent almost all of my time doing. I was an incessant innovator and that required a lot of practical thinking. But I eschewed the theoretic. My M.O. was experimentation: Begin with a hypothesis about how to make something new or better. Test it to a reliable degree. Then make adjustments.

Since I knew very little about business, I had the advantage of testing theories that were outside the box of recognized business truths. This taught me two things: Traditional practices are usually there for a good reason. And when new ideas work, they can work big.

In the year 2000, I began to write a blog (called Early to Rise) about what I had learned about business. It forced me to think more abstractly about my experience, and gave me an opportunity to step back and see patterns. And after doing that on a daily basis for five or six years, I was able to see patterns in the patterns.

One of the great pleasures of writing those daily essays was knowing that I was refuting some long-held beliefs and introducing (what seemed to me to be) new ideas about how to launch and grow businesses in the digital age.

It was then that I got the urge to host a very special, very high-priced seminar where I could explain my insights to smart and successful entrepreneurs who wanted to grow their businesses.

The goal was not financial. I could have charged little or nothing to attend. But I wanted to attract serious people, entrepreneurs with enough success in business to challenge my ideas if they didn’t make sense.

It was a four-day event and the fee was $10,000. Since this was the first time I would be charging this kind of money for my expertise, I was more than a little worried.

But I told myself that I would be okay. All around me, self- proclaimed business experts were charging $1,000 to $5,000 for seminars and getting plenty of eager people to pay up. I knew many of those experts. And most of them, in my humble opinion, were one-trick ponies – zero-down real estate gurus, direct-marketing pundits, or motivational speakers. Few of them had my depth or breadth of experience. If they could get away with charging as much as $5,000, I reasoned, I should be able to charge $10,000.

So I spoke to MaryEllen Tribby, the woman that was running Early to Riseat the time, and she helped me put it together. Three months later, she had everything set up and 30 tickets sold.

[Marketing Tip:The easiest way to create profits in your business is to sell your best customers a higher-level version of something they have already bought. MaryEllen’s marketers did that by sending out a special invitation to a limited number of Early to Risesubscribers who had already spent $2,000 on a three-day conference with various business writers. My seminar was positioned as more (four days) and better (with me only). And it sold out in a matter of weeks.]

The only thing left was to come up with an agenda that would justify an investment of $10,000 by each attendee. When I reviewed the credentials of the 30 people who had signed up, doubt once again gripped me. What could I do for them that would be worth what they had paid? The saying “Pride comes before the fall” haunted me.

Aside from the fact that all 30 had achieved a great deal in their careers, each had a different sort of business. Some were beginning new businesses. Many were growing modest-sized companies. And some had well-established $10 million to $25 million enterprises.

And if that were not challenging enough, their businesses ranged from professional services to publishing to manufacturing. Even to restaurants!

On the one hand, I had, by that time, such wide experience in business that I felt confident I could be helpful in some way to each of them individually. But this was a group event. And we had limited time.

I certainly could not dumb down the discussion to the basics of entrepreneurial success. Most of these people were well beyond that. I had to create a program that was both high level and fundamental, with ideas that were universal to all entrepreneurial businesses but also specific enough to satisfy each and every attendee.

I thought about it for several days, but I could not come up with a satisfactory approach. I called in two colleagues – senior writer Charlie Byrne and contributing business management expert Richard Schefren (both superstars in their domains) – and I explained my problem to them.

The efficient market hypothesis is bogus. The stock market, its sectors, and its individual stocks are often mispriced. But that doesn’t mean speculating on those errors makes sense.

Speculation is at best an intellectual form of gambling, like playing blackjack rather than roulette or craps. But all forms of speculation are likely to decrease one’s wealth over time. And every experienced speculator, in his heart, knows this to be true.

Selling speculations is not speculating. It is a form of business. And for some, it is a very profitable business.

The prudent wealth builder that speculates treats his speculations as spending.

Delray Beach, FL.- In an essay published in Investopedia, Tim Parker writes: “Whether speculation has a place in the portfolios of investors is the subject of much debate. Proponents of the efficient market hypothesis believe the market is always fairly priced, making speculation an unreliable and unwise road to profits. Speculators believe that the market overreacts to a host of variables. These variables present an opportunity for capital growth.”

The argument Parker attributes to speculators is correct. The stock market is often inappropriately priced. And sectors within the stock market are badly priced even more often. Not infrequently, market sectors are grossly mispriced. The same is true for individual stocks.

I am always astounded when I think of how quickly and widely accepted the thesis of the efficient marketplace came to be. The logic, simply put, is that the big financial players – including institutional investors, hedge funds, and the like – have, through internet communications and computer technology, access to all of the key financial data they need to value stocks. They even have access to indices of public sentiment. With all that knowledge available and updated in nanoseconds, the price of any stock, any sector, and even the market itself will of necessity reflect the correct pricing.

This doesn’t make sense on several levels. For one thing, it is impossible to measure consumer sentiment or to predict its ebb and flow. More importantly, raw data (such as history of earnings, revenue growth, P/E ratios, etc.) cannot possibly give a reliable view as to the value of a company in the future.

I cannot tell you with any accuracy the true value of the equity of any of the companies I own and control. And I certainly could not predict what the value will be in six months or a year. So how could these data-crunching investment behemoths know?

But forget about the logic. Take a look at any 20-year period of stock market valuations and you will find moments when the market “corrected” itself, sometimes with a fall of 10% or more. What is happening there? There can be only one answer: irrational exuberance. And as I have already pointed out: You cannot measure accurately, let alone predict, the fluctuations of investor sentiment.

But that doesn’t mean that speculating is a reasonable way to accumulate wealth.

(Note: Hedging and arbitrage are not necessarily speculating. If done properly, they are the opposite. We will talk about them another time. This is about speculating and only that.)

What is speculating? John Maynard Keynes said it is acting as if one “knows the future of the market better than the market itself.” I like that definition because it emphasizes the core problem with speculating. It is fundamentally a bet on the future. And betting on the future is betting on something that is largely unknowable. Why bet on future possibilities when you can make good money investing in the known facts, the realities, of the present?

Professional speculators use sophisticated strategies such as swing trading, pairs trading, and hedging along with fundamental analysis of companies/industries and macro analysis of economics/politics to place their bets.

Just think about what I just said. The best speculators are crunching numbers from all these realms and using complex, technical strategies to make their decisions. And it is all done in the hope of getting way-above-average ROIs. It’s a whole lot of work. And at the end of the day, success depends on thousands of uncontrollable and even unknowable details. Where is the reasonableness in that?

John Bogle, bestselling author and founder of the Vanguard Fund, wrote a book called The Clash of Cultures: Investment vs. Speculation. In it, he demonstrated that individual investors almost always lose big when they speculate. He says that speculating is an “unwise” strategy for ordinary people whose goal is to safely accumulate funds for retirement.

“The internet and financial media may encourage speculation,” he says. “But that doesn’t mean you should follow the herd.”

Indeed. The reason the financial media and the brokerage community promote speculation is because they benefit from the fact that most speculators lose and lose big. And all those losses end up in the pockets of the brokers and the bankers and also the prudent investors that would rather invest their money safely for reasonable gains than gamble for big wins.

* In this series of essays, I’m trying to make a book about wealth building that is based on the discoveries and observations I’ve made over the years: What wealth is, what it’s not, how it can be acquired, and how it is usually lost.